Half full, and rising: investment pros are bullish on a recovery led by stocks--U.S. interest rates and elections not withstanding.

The bulls are limping along while the bears are still mostly hibernating in 2004, at least for now. Despite some investors' jitters about, among other things, the health of the world economy, stocks, after a stellar rally last year, continue to be the asset of choice for portfolio managers polled by LATIN TRADE.

After a nearly three-year drop in the markets, the worst in two decades, U.S. stocks came roaring back to life in 2003, spurred in large part by a domestic economy that grew at an 8.2% clip in the third quarter, later cooling to 4.1% in the fourth quarter. Other major world stock markets have also done extremely well, including those in Germany and Japan as well as emerging markets, such as Brazil. Japan's Topix index surged by 35% at its peak in March; that country's Nikkei average performed comparably. Frankfurt also boasted a healthy spurt, with the DAX index growing a whopping 85% during the same period. Also in March, Brazil's benchmark Bovespa index rose 113% over the previous year.

"Clearly the stock market has been an excellent investment since the middle of 2002 to the present," says analyst Marcelo Monpelat at Raymond James in Montevideo. After six months, however, it has become clear that 2004 won't be as dazzling; the mood is decidedly one of cautious optimism, say analysts.

Investors are apprehensive in some measure because last year was so good. Record low global interest rates not only provide mass access to cheap money but also make investing in bonds less attractive, driving appetite for risk. Stocks in turn soaked up much of the cash, as investors looked to ride the bull to better returns.

The widely held belief that the world was headed for a strong recovery in 2004 also helped spur massive speculation. But this enthusiasm has grown tepid in some quarters. Merrill Lynch found in its March survey of international fund managers that less than half of respondents expected substantial improvement of the global economy in what remains of the year.

Buy low. Furthermore, the report showed that positive expectations of commodity prices and corporate profits also tumbled. Burgeoning trade deficits, weak employment numbers and plummeting consumer sentiment in the United States have tamed investor confidence worldwide. "One of the concerns is that if the U.S. dollar were to fall further ... it would cause interest rates to rise in the U.S. and that could hamper the growth we are foreseeing right now," says Frank Almada, President and CEO of brokerage Union Capital in Tucson, Arizona.

No matter--the experts are still stuck on stocks, for now. "Global equity markets look pretty good," says Hugh Neuberger, managing director and chief investment officer with Credit Suisse Asset Management. Neuberger favors stocks over bonds because, he says, in the near term, "it is unlikely that the fixed income market will improve."

Part of the reason is that most investors now believe that global economic growth during 2004 will be strong, though uneven and not as robust in some regions. The International Monetary Fund forecasts the world economy growing at a respectable 4%, with the United States and Japan posting solid gains and Europe performing more modestly. China and Latin America are also expected to do well. This synchronized recovery bodes well for the pro-equities camp.

"Historically, the stock market has outperformed fixed income securities in periods of growth," says Franco Castro, president of Global Strategic Investments, a private investment firm which caters to high-net worth Latin Americans.

Given the current economic conditions and business outlook, however, there are some clear ideas on which stocks should roar and which should sputter. "The market globally is preparing itself for a turn in the interest rate cycles," says Tony Volpon, an economist with Titulo Corretora, a Sao Paulo brokerage. "I think what high-net-worth investors should be looking for are assets that will do well in such a cycle."

In the second year of a bull market cycle, investors are looking more for noncyclical stocks to begin outperforming the cyclicals, says Federico Sanchez, senior vice president and head of new business in Florida for Fiduciary Trust, a subsidiary of Franklin Templeton Investments.

That's because cyclical stocks fluctuate rapidly as the economy swoons. Cyclical businesses include paper companies, retailers and automakers--all industries dependent on consumers having enough money to pay for nonessential goods. If the economy does well, they do well; if the economy tanks, so do those stocks. Noncyclical businesses are those that sell well regardless of the prevailing economic winds. These include utilities, pharmaceutical companies and food retailers--companies that satisfy needs. Sanchez says that his clients' portfolios are invested in healthcare, information technology, telecommunications and utilities.

Beyond cycles, the experts are looking at particular regions, especially Asia, to plot investment strategy for the next 12 months. There are signs that Japan is at last coming out of its 13-year economic coma. The world's second-largest economy grew by an annual rate of close to 6% in the final quarter of 2003. With rising domestic demand, consumer confidence and an improving corporate profits out look, there are encouraging numbers coming from the deflation weary nation. "The [economies of the] U.S., Japan and other parts of East Asia are all growing at relatively high rates," says Christian Stracke, sovereign analyst with CreditSights.

China, however, looms much larger in the minds of global investors. To breathe fire, China must consume prodigious amounts of commodities, sending global raw materials prices soaring, in stone cases to record highs. China has emerged as the world's leading iron ore importer in its efforts to feed the mammoth appetite of its construction, automobile and shipbuilding industries. China's spending frenzy also extends to oil, food, cement and copper.

Beijing to Brazil. So how do you play China when Chinas buying just about everything? That means commodities, traditionally a high-risk investment. "The volatility of commodities is quite high historically," says Credit Suisse's Neuberger.

One way to bet on China is to bet on Brazil. Brazil's exports to China amount ed to more than US$4 billion last year, and there have been high-level meetings between the two governments to improve and increase bilateral trade. The biggest deal between the two countries so far is a $1.4 billion joint venture between Chinas Baosteel Group Corp. and Brazil's Companhia Vale do Rio Doce. the world's largest producer of iron ore, to construct an integrated steel plant in the northeastern Brazilian state of Maranhao.

Analysts say that investors should consider Sadia, a Brazilian chilled and frozen foods company, and Petrobras, Brazil's state oil giant, in their portfolios because they benefit directly from growing Sino-Brazilian trade.

China should be approached with some caution, though. Analysts fear the country's economy is overheating, and that some commodity prices have topped out. "The implications of a correction in China will certainly be felt throughout the region ... [and] Brazil would know about it very quickly," says Juan Carlos Alvarez de Soto, chief investment officer with Banco Santander Central Hispano Suisse.

Although there clearly are some good investment opportunities in their own backyard, Latin American investors often approach their regional markets gingerly. "Latin Americans have a keen sense of risk," says Reinaldo Pascual, a finance and securities lawyer at the Atlanta, Georgia law firm of Kilpatrick Stockton.

Pascual notes that Latin Americans. exposed to political and currency volatility at home, tend to reduce that risk by investing a portion of their portfolios in the United States. Investors in the region also tend to be more conservative than their counterparts in other countries because they seek to preserve their wealth, not remake it. "For a typical Latin American investor, the moderate portfolio is 60% fixed income, 40% equities," says Banco Santander's Alvarez, whereas U.S investors, for example, may have the opposite configuration.

Despite the emphasis on stocks, Latin American investors do and should continue to strive for proper portfolio diversification, not only in terms of geography but in terms of assets as well, experts say. To defend against rising inflation, for example, Alvarez says that his bank recommends Latin American clients to invest in instruments that can help protect capital, such as U.S. Treasury inflation-protected securities.

Such securities adjust the principal periodically for inflation. The holder still earns interest semiannually, like other traditional Treasury bonds, but on the adjusted amount. At maturity, the investor receives the adjusted principal or the original par amount, whichever is higher. "What you are assuring is that there is a real yield, a yield above inflation" says Alvarez. Although he admits that these instruments have been expensive recently, investing in them, he says, "is the ideal way to preserve purchasing power over the long term."

Hedging bets. In terms of asset allocation, managers also tout the benefits of hedge funds and funds of hedge funds, which, as the name suggests, invest in a variety of hedge funds. Hedge funds are similar to mutual funds in that their contributors seek to pool their money in the hopes of gaining higher returns by investing in various financial instruments. The difference is that hedge funds do not have to register with the U.S. stock market regulator, the Securities and Exchange Commission. Hedge funds vary enormously in terms of their investment strategy and can be highly specialized. Still, investing in hedge funds may be a prudent move because they offer limited volatility. "A hedge fund manager can a get piece of the upside and have limited exposure on the downside," says Castro.

Looking at the second half of 2004, there are still many what-ifs, including the U.S. presidential election in November. The markets don't like the uncertainty of a hotly contested campaign, which in 2004 is gearing up to be one of the nastiest in some time--starting a full eight months ahead of the vote. The markets may wobble quite a bit if no clear front-runner emerges in the lead-up to the election.

Other dark clouds looming on the horizon include U.S. short-term interest rates. The U.S. Federal Reserve is widely expected to maintain low interest rates throughout the 2004 presidential campaign. The political fallout of a sodden move on rates could be disastrous, not to mention the implications for the financial markets. The U.S. monetary authority has plenty of room to maneuver--its basic rate is at 1%, a 48- year low. But a move upward of a mere 25 or 50 basis points could rattle investors as they begin to rethink their investment strategy. Most analysts agree however that U.S. central bankers will try hard to not be a factor in an election year.

Terrorism is another unknown quantity, but this year has unfortunately provided investors with clues as to its effects on the markets.

While enthusiasm for stocks is wide spread, it's not unanimous. Warren Buffett, the folksy U.S. billionaire recognized as the winningest long-term investor in recent history, told shareholders in his company Berkshire Hathaway that, recently, the holding company has found it hard to find bargains in the stock market.

Pundits, who, often in vain, pore meticulously over Buffett's declarations--after all, he has made billions of dollars playing the same markets--see this as evidence that now is the time to pull back on stocks. Buffett is famous for chomping on his standard meal of steak accompanied not by some fine vintage but Cherry Coke, a company in which has been a major investor. Investors should do as he does don't go for the flavor of the month, and invest wisely.

JOSE MENENDEZ * MIAMI